2016 ends with record-breaking CAT loss and dramatic decline in income | Canadian Insurance

2016 ends with record-breaking CAT loss and dramatic decline in income

The year is also notable for insurers’ strategic ventures, according to new MSA report

The insurance industry was “put through the wringer” in 2016 with a record loss of $5.3 billion due to catastrophes (CATs) and notable events, according to a new quarterly report by MSA Research. The industry also saw its net income in the fourth quarter (Q4) of 2016 cut in half compared to Q4 2015.

The Fort McMurray wildfire proved to be most costly disaster in history for Canadian insurers and the industry also experienced higher than average losses for other CATs throughout the year, the report states.

“The fact that the industry made it through should not lead anyone to complacency. Reinsurance programs have surely been re-examined at year-end; insurers need to remain constantly attuned to their exposures and coverages – re-instatements may not be so easy to come by next time around,” writes Joel Baker, president and CEO of MSA Research, in the report.

“Brokers too must be vigilant to ensure client coverages are appropriate, especially if the next big one is a water event rather than fire one,” he adds.

The industry exited 2016 with a “slim underwriting profit” thanks to milder weather and strong reserve releases in Q4 2016 but saw its net income for the quarter cut in half to $2.4 billion from $5.2 billion in Q4 2015.

Low interest rates, CATs and deteriorating auto results in Alberta and Atlantic Canada contributed to the dramatic decline in quarterly income.

Companies re-align

In addition to financial results, the report also notes some of the major strategic shifts by the large insurers. The previous year and the first few months of 2017 were “momentous for the structure of the Canadian P&C industry as carriers realigned themselves like boxers preparing themselves for the next title match,” writes Baker.

Some insurers have been enhancing their efforts in the technology space with their own ventures or by investing in others. For example, Economical Insurance launched its “digital first” online insurer, Sonnet, in 2016. Intact Financial announced in March that it is a part of a consortium of financial services institutions that have invested in Toronto-based Vector Institute, which focuses on artificial intelligence research.

Some notable mergers and acquisitions activity also marked 2016. Aviva Canada purchased RBC General Insurance Co. thereby “giving Aviva volume and a powerful distribution platform and relieving RBC of the volatile and irritating insurance cycles beset by catastrophes and Ontario auto,” the report states.

Desjardins Group, which purchased Western Financial Group (WFG) in 2011, undid that acquisition by selling WFG’s pet insurance arm to Economical in May 2016 and the rest of WFG to Trimont Financial, a subsidiary of The Wawanesa Mutual Insurance Company, in February of this year for about $775 million.

“The original acquisition of WFG by Desjardins was somewhat odd given the disparity in distribution cultures. True integration never happened and it caused some headaches for the broker community,” writes Baker. “The sale to [Trimont] made a lot of sense strategically for both companies – though the sticker price was high.”

The sale of WFG allows Desjardins to free up capital and increase its focus on continuing to integrate State Farm Canada, which Desjardins purchased in 2014, into the firm.